Bad News: Some Advisors Only Want You If You Have a $100,000 Portfolio

Saving for retirement is hard enough, but now the big guys in the financial services industry continue to add more barriers to make it harder for average Americans to implement a successful retirement strategy.

The latest examples come in the form of more lawsuits, regulatory challenges and lobbying against adopting any pro-investor advisory models that force advisors to give their clients honest answers. It sounds simple enough, but financial advisors don’t want to tell their own clients, the people sipping coffee sitting across of them in the meeting room, exactly how much they are making in fees, commissions and other incentives for promoting one investment over another.

Take this simple situation: an average American worker planning for retirement, or the purchase of some other big ticket item, goes to their friendly neighborhood advisor and asks them to recommend some mutual funds for their portfolio.

Simple enough.

Their financial advisor has two choices: They can follow what is known as the “fiduciary” standard. “Fiduciary,” a Latin term dating back to the Crusades, basically says financial advisers should put their customers’ interests ahead of their own. They also must be open and disclose “any actual or potential conflicts-of-interest an adviser may have, including any financial considerations that could affect the objectivity of an adviser’s advice. Investment advisers are governed by this standard,” according to attorney James Watkins, CEO/Managing Member at InvestSense.

James Watkins III

But what if the financial advisor doesn’t want to tell their client everything? What if they are getting money or some other incentive from the investment manager or their own firm to promote one fund over another? After all, there are 105 large cap growth funds available, according to Morningstar, so which one is best suited for the client?

This poses a problem. But the financial services industry that promotes the interests of its own advisors, planners and most importantly, itself, has another response. This brings us to the second standard, “the so-called “suitability” standard, that allows a financial advisor to put their interests, as well as those of any broker-dealer that they work with, before those of their customers.

“The suitability standard does not require a financial advisor to make the full disclosure required under the fiduciary standard, thereby allowing an adviser to conceal situations where an advisor is providing advice which is based on the financial benefit that the advisor will receive and is knowingly recommending actions that the advisor knows are not in the customer’s best interests at all. This is the standard that most stockbrokers operate under,” Watkins said.

So here is the situation: If you are investing in a 401(k) or in an individual or family portfolio, you can get honest or less-honest advice.

Ironically, you pay more for the less honest advice, since you are being charged a higher fee, in most cases. If this happens, you should make sure your advisor is taking you out to steak dinners weekly.

But there are two other problems: First, when you pay for advice under the suitability standard, you will invariably be investing in an actively managed fund. These funds are sold using a few hot buttons: the manager is a great stock picker and can bench press his weight. Or, active funds are nimble and can quickly respond to any market gyration to buffer the losses on the downside and move faster to capture them on the upside. Studies say this is not true, but the sales people continue to use the old pitch.

So how is one firm handing the problem of presenting less-than-honest advice?

“LPL Financial, the country’s largest independent broker-dealer, has asked the Securities and Exchange Commission (SEC) to make modifications to its proposed broker conduct standard, which one RIA advocate argues could ‘emasculate’ its requirements that brokers mitigate or eliminate their conflicts of interest,” according to one news story in an industry publication. That is strong language from LPL and it indicates how much money is at stake if their advisers forego their many streams of undisclosed revenues from product sales.

When I worked in the industry, the internal wholesalers would cherry pick some data that showed how our funds would rebound faster than some other laggard. This “time to recovery” chart was used against enemy funds A, B, and C to make our funds look good, but they were often too short-term to be valid.

Asking Advisors to Earn Their Money

Aside from just picking mutual funds, advisors are charged with making asset allocation and portfolio optimization decisions. They has been huge advances in automating this process (the rise of robo-advisors, for instance) that can make it harder for investors to suffer excessive market losses. But if you are a client who has an advisor who is working under the suitability standard, your advisor should be explaining how all of your different stock and bond investments behave in a declining and appreciating markets. To do this honestly, your advisor should adopt the fiduciary standard.

When it comes to index, or passively managed funds versus actively managed mutual funds, the research is overwhelming. As attorney and fiduciary advocate James Watkins of Investsense, explains in this post:

“Contrary to popular belief, actively-managed funds, on average, have actually tended to underperform a broad market benchmark in bear as well as bull markets.(1) Various studies have concluded that

“Approximately eighty-five percent of actively-managed mutual funds underperform their relevant index over the long-term ;(2)
•”Contrary to popular belief, actively-managed funds, on average, have tended to underperform a broad market benchmark in bear as well as bull markets. Despite the opportunity for active managers to add value during bear markets, they have done so only inconsistently, at best.(3)
• “A similar study by Standard & Poor’s analyzing two recent five-year market cycles, 1999 to 2003 and 2004 to 2008, found that a majority of actively-managed funds in all nine domestic equity style boxes were outperformed by corresponding S&P indices.(4)
• “A study by the Schwab Center for Investment Research reported that:
(1) Index funds outperformed actively-managed funds in 55% of the down markets
(2) In the worst downturns, defined as declines of 10% or more, index funds
outperformed actively-managed funds 75% of the time.
(3) In the longest downturns, defined as declines of 5 consecutive months or longer,
index funds outperformed actively-managed funds 100% of the time.(5)”

Many Advisors Don’t Want Your Money

Finally, the furious and rabid Republican-led challenge to whether financial advisors should be honest with their customers has another side. If the advisors cannot make enough money from you in commissions and fees, they don’t want you as a client. At a Market Counsel Summit industry convention held in December 2018, the president of the Financial Services Institute, Dale Brown, argued that investors with a $50,000 portfolio would not be able to get advice needed to protect their portfolios in a bear market. Brown said the current suitability standard won’t generate enough commissions to make it worthwhile to engage people with “only” $50,000 to invest.

According to an article by Ian Wenik on the Summit, a few of the speakers “wrestled with the fact that the high financial barrier to accessing advice from an RIA complicates matters. A request for a show of hands from advisors (in the audience) who accepted $100,000 standalone accounts yielded only two takers.”

Read that again. While not scientific, only a few financial advisors in the audience indicated they would be interesting in working with investors that “only” had $100,000 in assets.

So if you think saving for retirement is hard, that is only the first step. The Republican and the financial services lobby have reversed any semblance of the fiduciary standard because it interferes with the industry’s ability to make lots of money. (For more about how fees hurt investors, see the book, How 401(k) Fees Destroy Wealth.)

This leaves us the bigger question: Who sticks up for the average investor today in your state or in Washington D.C.?

If you can think of anyone, let me know.

But There is Good News

So if an advisor says your $100,000 portfolio is too puny for him to make money, there is good news. There are registered investment advisors (RIAs) who have a fiduciary obligation to their clients. This means they are supposed to put your interests ahead of their own by suggesting the best products and strategies geared towards your needs. This sounds simple enough, but be selective when choosing an RIA. Investigate their firm and their disciplinary record from the SEC.

RIAs are the best alternative to advisors who want to extra, often undisclosed, compensation. And until the financial services industry and the Republicans are forced to prioritize investor interests, caveat emptor.

Chuck Epstein

Chuck Epstein has managed marketing communications and public relations departments for major global financial institutions and participated in the launch of industry-changing financial products. He also has written by-lined articles for over 50 publications, five books and served as editor and publisher of nation’s first newsletter on the topic of using the PC for personal investing and trading. (“Investing Online, 1994-1999). He also is a marketing consultant, writer and speaker on topics related to investor protection and opportunities in the very dynamic cannabis industry.

He has held senior-level marketing, PR and communications positions at the New York Futures Exchange, Chicago Mercantile Exchange, Lind-Waldock, Zacks Investment Research, Russell Investments and Principal Financial.

He has won national awards from the Mutual Fund Education Alliance (MFEA) and his web site, www.mutualfundreform.com, was named best small blog in 2009 by the Society of American Business Editors and Writers (SABEW).

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